HomeMy WebLinkAboutStaff Report 3595
City of Palo Alto (ID # 3595)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/16/2013
City of Palo Alto Page 1
Summary Title: Gas Utility Financial Projections
Title: Utilities Advisory Commission Recommendation that the Finance
Committee Review the 5 -Year Financial Forecast for the Gas Fund and Take
Action on Whether to Recommend that Council Approve An Adjustment to
Gas Rates Effective July 1, 2013
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee:
1. Review the 5-year Financial Forecasts for the Gas Fund; and
2. Recommend that Council not adjust Gas Rates effective July 1, 2013.
Draft Motion
Motion to:
1. Accept the Gas Fund five-year financial forecast and forward it to the full Council for
review and input.
2. Recommend that Council not adjust Gas Rates effective July 1, 2013.
Executive Summary
This report reviews the projected costs and revenue requirements for the Gas Fund for Fiscal
Year (FY) 2014 through FY 2018. Staff assessed major cost drivers and expected costs, the short-
term risks, reserve guidelines, and the revenue requirements for the Gas Fund for the next five
years. Overall, no rate adjustments are needed for FY 2014 and only very small overall revenue
adjustments are expected to be required over the entire 5-year forecast horizon.
On July 1, 2012, gas commodity rates for all customers were changed to monthly-varying,
market-based rates while gas distribution rates include fixed and variable charge components.
Therefore, commodity cost changes are passed through to customers with no need to change
the rate itself. On the distribution side, no rate increases are needed over the 5-year financial
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forecast period due to the level of financial reserves and the deferral of Capital Improvement
Program (CIP) projects.
At its March 6, 2013 meeting, the UAC reviewed the 5-year financial forecasts for the Gas Fund
and recommended no change to current Gas Utility Rates.
Background
In order to maintain the financial viability of the Gas Fund, staff conducts an annual review of
major cost drivers and expected costs; evaluates risks and adequacy of reserves; and determines
the revenue requirements for the Gas Fund for the next five years. The revenue requirements
and resulting rate adjustment targets depend on a number of factors including sales revenue
projections, gas supply costs, distribution system operating and Capital Improvement Program
(CIP) expenses, prudent funding of the Gas Supply Rate Stabilization Reserve (G -SRSR), the Gas
Distribution Rate Stabilization Reserve (G-DRSR), and debt service payments. Changes in these
factors can trigger an adjustment to the revenue requirement.
The last change to gas retail rates was implemented on July 1, 2012. At that time, gas
distribution rates were re-aligned and increased by 25% and the commodity rates for all
customers were changed to monthly-varying, market-based rates.
Discussion
Financial Projections
Table 1 below shows the summary of financial projections for the Gas Fund for FY 2013 to FY
2018. The system average rate projections are a combination of forecas ted natural gas
commodity prices and any changes forecasted for the other supply and distribution rate
components. The retail rate projections are based on gas market price projections as of
November 27, 2012. Since gas supply retail rates will change monthly, the actual total rate
could be higher or lower than these projections. For example, forward gas prices as of February
12, 2013 are 8% lower than those on November 27, 2012.
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Table 1: Gas Fund - Summary of Financial Projections
($'000)
Adopted Actual AdoptedProjected
2012 2012 2013 2013 2014 2015 2016 2017 2018
1 % CHANGE IN TOTAL SYSTEM RETAIL RATE 1%-4%-8%-6%-1%2%1%2%1%
2 TOTAL SYSTEM AVERAGE RATE ($/Therm)1.412$ 1.362$ 1.254$ 1.201$ 1.253$ 1.274$ 1.291$ 1.315$ 1.338$
3 COMMODITY COST ($/Therm)0.614$ 0.516$ 0.517$ 0.464$ 0.482$ 0.503$ 0.513$ 0.534$ 0.552$
4 SALES IN THOUSAND THERMS 30,685 30,447 30,477 30,011 30,011 29,980 29,937 29,863 29,792
5 CHANGE IN RETAIL SALES REVENUE - - 5,341 4,923 - - 198 105 110
5
6 Utilities Retail Sales 43,078 41,034 37,877 35,549 37,343 37,949 38,379 39,023 39,598
7 Service Connection & Capacity Fees 710 592 720 720 580 602 640 662 686
8 Other Revenues & Transfers In 96 103 124 841 124 124 124 124 124
9 Interest plus Gain or Loss on Investment 948 1,119 813 813 718 386 420 384 327
10 Total Sources of Funds 44,832 42,847 39,533 37,923 38,765 39,061 39,562 40,193 40,734
11
12 Supply Commodity 18,660 15,356 14,814 13,552 13,793 14,341 14,606 15,212 15,748
13 Supply Transportation 737 879 1,472 1,060 1,377 1,503 1,546 1,589 1,633
14 Supply Operations 1,532 1,006 866 866 880 907 931 960 991
15 Distribution Operations 13,414 11,168 10,809 10,809 10,979 11,321 11,613 11,980 12,358
14 Debt Service Payments 948 406 803 803 801 802 803 803 802
15 Rent 230 230 219 219 225 232 239 246 253
16 Transfers to General Fund 6,006 6,006 5,971 5,971 5,818 5,855 5,955 6,227 6,530
17 Other Transfers Out 170 170 207 207 206 212 217 222 227
18 Capital Improvement Programs 7,821 7,821 7,756 8,071 1,595 2,363 5,292 5,562 5,922
19 Total Uses of Funds 49,518 43,043 42,917 41,557 35,675 37,537 41,202 42,802 44,464
20
21 Into/ (Out of) Reserves (4,687)(196)(3,384)(3,634)3,090 1,524 (1,640)(2,609)(3,729)
Fiscal Year
City of Palo Alto
Gas Utility
FY 2012 Expenses and Revenues
Total uses of funds (Line 19 in Table 1) were $43.0 million in FY 2012, which is $6.5 million
lower than budgeted mainly as a result of lower (by $3.3 million) than expected supply
purchase costs and lower (by $2.2 million)than budgeted distribution operations expenses. The
primary reason for the lower distribution operation expenses can be attributed to the sewer
pipeline inspection (gas cross-bore) program, which was not completed as planned in FY 2012
so the program continued into FY 2013, with the unspent funds being encumbered for those
purposes.
Total sources of funds (Line 10 in Table 1) was $42.8 million, which was $2 million lower than
budgeted mainly due to the lower than expected revenues from the large customers that had
market-based supply rates and the corresponding lower market costs. The combined effect of
lower costs and lower revenues was the withdrawal from the Rate Stabilization Reserves of
only $196,000, instead of the budgeted withdrawal of $4.7 million, in FY 2012.
FY 2013 Expenses and Revenues
The projections for FY 2013 follow a similar pattern. Supply purchase costs are expected to be
$1.3 million less than budgeted due to the decrease in market prices, and transportation costs
are projected to be lower by $400,000 for the fiscal year. These savings are offset by a mid -
year budget request of $300,000 for increased construction costs, resulting in a projected net
reduction in total use of funds of $1.4 million for FY 2013.
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FY 2014-FY 2018 Cost Drivers
Commodity expenses represent the cost of gas procured to serve the City. As a result of the
decision to pass through market price-based commodity prices on a monthly basis, no more
forward fixed-price gas purchases have been made for delivery beyond October 2013. Howe ver,
the cost of gas through October 2013 includes previously purchased fixed -price gas totaling
$600,000, or 4% of the expected Citywide gas usage. For the remaining deliveries, the cost of
gas is assumed to be equal to market price projections as of November 27, 2012. The difference
between the actual market price at time of delivery and the cost of the fixed -price transactions
will be drawn out of (or credited into) the G-SRSR.
The supply transportation cost is based on Pacific Gas and Electric Company’s (PG&E’s)
wholesale gas transportation rates for Palo Alto, as filed in Advice Letter 3360 -G. The advice
letter, filed on January 25, 2013, reflects changes to transportation rates to include ratepayers’
responsibility for costs associated with the implementation of PG&E’s Pipeline Safety
Enhancement Plan (PSEP), which was approved by the California Public Utilities Commission
(CPUC) in Decision 12-12-030. For 2014, staff assumes a PSEP cost adder of $0.01979 per therm
based on the CPUC decision. For the remaining years, staff assumes that the local
transportation rate will escalate at 3% per year.
Equity transfers to the General Fund are projected to decrease slightly in FY 2014 because the
Council-adopted equity transfer methodology calculation (CMR:260:09) uses PG&E’s Return on
Equity, which was recently lowered by the CPUC from 11.35% to 10.4%. Beyond FY 2014 the
transfer amount will grow as the net asset value continues to rise.
Other operating expenditures such as operations, maintenance, and rent are projected to
increase by 3% per year. Salary and benefit cost projections are from the City’s long-range
financial forecast. Final operating budget proposals will be presented to the UAC at its May
2013 meeting.
Capital Improvement Program (CIP)
Due to a backlog of previously budgeted projects (which have already been funded and
included in the CIP reserves), new planned gas main replacement and rehabilitation projects
have been deferred by two years. Therefore, the proposed FY 2014 and FY 2015 CIP budgets
are $1.6 million and $2.4 million respectively, followed by a more normal level of CIP
expenditures of $5.3 million in FY 2016 and increasing by 6%/year thereafter. Table 2 presents
the expected CIP costs for the financial forecast horizon. Also shown in Table 2 are revenues, of
around $600,000 per year (shown as negative numbers in the table), collected from new
customer connection and capacity fees.
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Table 2: Capital Improvement Program (FY 2014 – FY 2018)
2013-14 2014-15 2015-16 2016-17 2017-18
WBS Desc.Exp.Rev.Exp.Rev.Exp.Rev.Exp.Rev.Exp.Rev.
GS-02013 Direct. Boring Machi $0 $0 $0 $0 $46,350 $0 $0 $0 $257,500 $0
GS-03007 Directional Boring E $0 $0 $68,000 $0 $0 $0 $70,040 $0 $0 $0
GS-03008 Polyethylene Fusion $0 $0 $36,100 $0 $0 $0 $37,183 $0 $0 $0
GS-03009 Sys Ext Ops - Unreim $178,000 $0 $183,500 $0 $192,675 $0 $198,500 $0 $204,455 $0
GS-11002 Gas System Improveme $212,200 $0 $218,600 $0 $229,530 $0 $236,416 $0 $243,508 $0
GS-12001 GMR - Project 22 $0 $0 $468,000 $0 $3,200,000 $0 $0 $0 $0 $0
GS-13001 GMR - Project 23 $0 $0 $0 $0 $482,000 $0 $3,300,000 $0 $0 $0
GS-13002 General Shop Equipme $0 $0 $52,000 $0 $0 $0 $54,000 $0 $0 $0
GS-14003 GMR-Project 24 $0 $0 $0 $0 $0 $0 $492,000 $0 $3,465,000 $0
GS-15000 GMR - Project 25 $0 $0 $0 $0 $0 $0 $0 $0 $542,000 $0
GS-15001 Security at Gas Rece $0 $0 $150,000 $0 $0 $0 $0 $0 $0 $0
GS-80017 Gas System Extension $730,000 -$580,000 $752,000 -$602,000 $789,600 -$639,600 $812,000 -$662,000 $836,360 -$686,360
GS-80019 Gas Meters and Regul $325,000 $0 $335,000 $0 $351,750 $0 $362,303 $0 $373,172 $0
GS-14004 Gas System Model $150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total $1,595,200 -$580,000 $2,263,200 -$602,000 $5,291,905 -$639,600 $5,562,442 -$662,000 $5,921,995 -$686,360
FY 2014-FY 2018 Revenue Projections
Supply sales revenue is broken into three components based on the existing rate schedule
(commodity charge, administration fee, and PG&E local transportation). With market-based
pricing for the commodity charge, commodity revenues will mirror purchase costs. PG&E local
transportation rates are set to cover projected PG&E’s rates. Administration fees account for
the remainder of costs in the supply fund such as resource management costs, rent, etc.
The PG&E local transportation rates implemented on July 1, 2012 were set to reflect the
proposed rates that PG&E was planning to charge the City. However, the CPUC did not allow
these charges to take effect as planned so Council decreased the transportation rate effective
January 1, 2013 (Staff Report 3287). Not long thereafter, PG&E sent notice that it was going to
increase the rate effective February 1, 2013. Since the G-SRSR is currently large enough to
absorb this change, and as appeals have been filed with the CPUC regarding the rate, staff is n ot
proposing an immediate change to this component at this time. However, since this rate is a
pass-through of PG&E’s local transportation cost, and due to PG&E’s ability to effect rate
changes for this component with little notice, staff may propose chan ging this rate to a pass-
through component similar to the commodity charge in the future, within a Council approved
minimum and maximum range.
Supply administration charges were decreased effective July 1, 2013 as part of the re-alignment
of costs. Again, due to the health of the G-SRSR, no changes to this rate are projected to be
necessary until FY 2016. As this rate component is a relatively small part of overall gas revenues
($222,000, or 0.5%), any changes have nearly negligible effects on the system average rate.
Retail sales constitute the largest source of revenue for the gas distribution fund center. Other
major revenue sources include service connection and capacity fees, which are expected to
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decrease slightly by 1.0% per year, and interest and gains on investments, which are projected
to diminish somewhat in future years based on projected cash reserves and an assumed 2.2%
per year return on investment throughout the forecast horizon.
Gas Usage Projections
Gas usage in Palo Alto is generally volatile, varying with both the economic and weather
conditions. After a significant drop in usage from 40.7 million therms in FY 1999 to 31.5 million
therms in FY 2004, gas usage stabilized somewhat, but continued with its general downward
trend, decreasing by 3.2% in total during the next five years as a result of continued
investments in energy efficiency (EE), reaching 30.5 million therms in FY 2009. The City’s gas
usage was stable at that level in FY 2010 and FY 2011, with the exception of a small upward
adjustment due to weather. The long-term projections include an upward correction for FY
2013, followed by decreases averaging 0.15% per year thereafter. The usage projections
incorporate the expected impact of investments in gas EE consistent wi th the adopted ten-year
gas EE goals, as well as known changes in large customer attrition and additions. Cumulative
gas EE program impact by FY 2022 is assumed to be 1.4 million therms or 4.5 percent of
expected gas consumption.
Figure 1 presents the historical gas consumption levels (with and without the gas EE programs)
from FY 2008 through FY 2012 and projections for FY 2013 through FY 2022.
Figure 1: Historic and Projected Gas Consumption
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Revenue Requirement
The revenue requirement is the total amount of revenue that must be collected in order to
meet the planned expenditures for the Gas Fund. Based on the expected revenues and costs
presented in this report, the Gas Fund is projected to have an overall revenue surplus for the
next two fiscal years, followed by shortfalls during the rest of the forecast horizon. However,
given the level of the supply RSR, the Gas Fund is not expected to require any revenue
adjustments to the administration and PG&E local transportation components of the gas su pply
rate until FY 2016. Increases for those rate components are required after FY 2016. If
implemented, the amount of those increases would have rate impacts of 0.3% to 0.5% of the
projected total bundled gas rate for FY 2017 and FY 2018, respectively.
In addition, due to the expected level of the gas distribution reserve over the next several years,
no rate increases are projected for gas distribution rates over the entire 5-year planning horizon.
The Gas Fund’s projected costs and revenues from FY 2012 through FY 2018 are shown in
Figure 2 below.
Figure 2
Reserves and Risk Assessment for the Gas Utility
The Council-approved guidelines for the Gas Supply Rate Stabilization Reserve (G -SRSR) and Gas
Distribution Rate Stabilization Reserve (G-DRSR) require an annual assessment of short-term
uncertainties and risks for the supply and distribution business units.
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Gas Supply Rate Stabilization Reserve (G-SRSR)
In the past, the short-term risk assessment for the G-SRSR focused on market price volatility,
load uncertainty and supplier default. With commodity rates based on market price, this type
of risk is passed on to customers. There is, however, still a need to maintain some level of
reserves for the supply fund center to ensure prudent financial management of the utility,
specifically for operational cash management.
Table 3 below shows the typical monthly cash flow for commodity purchases during a fiscal
year. Column D is the cost of purchased gas and Column E is cash flow out for payment of th e
gas, which is due in the following month. Due to the time elapsed from customer usage of gas
to meter reading, bill processing and, finally receipt of payment from customers, there can be
up to a two month delay between when CPAU pays for the gas delivered and when it collects
payments from customers for the gas delivered. This cash flow issue is amplified by the
seasonal nature of gas consumption. For the forecasted gas usage, cash reserves of around
17% of the annual gas commodity budget (Column I of Table 3) are required to cover the cash
flow needs.
Table 3: Expected Cash Flow for Gas Commodity Purchases and Collection
Operating
Month
Monthy
Gas
Purchases
(therms)
Market
Price
($/MMBtu)
Monthly
Gas
Purchases
($)
Payment
for
Commodity
($)
Commodity
Revenue from
Customers ($)
Monthly
Difference
($)
Cumulative
Difference
($)
Cash
Shortfall
Over Total
Budget (%)
A B C D E F G H I
July 1,436,483 3.942 566,262 614,578 952,120 337,542 337,542 2.6%
Aug 1,488,626 3.844 572,228 566,262 736,858 170,596 508,138 3.9%
Sept 1,559,505 3.868 603,217 572,228 614,578 42,351 550,489 4.3%
Oct 2,143,518 3.898 835,543 603,217 566,262 (36,955) 513,534 4.0%
Nov 2,870,452 4.101 1,177,172 835,543 572,228 (263,316) 250,218 1.9%
Dec 4,372,342 4.278 1,870,488 1,177,172 603,217 (573,956) (323,738) -2.5%
Jan 4,556,372 4.290 1,954,684 1,870,488 835,543 (1,034,945) (1,358,682) -10.5%
Feb 3,493,145 4.289 1,498,210 1,954,684 1,177,172 (777,511) (2,136,194) -16.6%
March 3,012,892 4.241 1,277,768 1,498,210 1,870,488 372,278 (1,763,915) -13.7%
April 2,534,625 4.199 1,064,289 1,277,768 1,954,684 676,916 (1,086,999) -8.4%
May 1,928,689 4.179 805,999 1,064,289 1,498,210 433,921 (653,079) -5.1%
June 1,581,286 4.224 667,935 805,999 1,277,768 471,768 (181,310) -1.4%
Total 30,977,936 12,893,794 12,840,437 12,659,127
Cash flow needs are affected both by gas usage patterns and by the cost of gas. Table 4 shows
the cash flow needs for the expected case and scenarios with winter gas usage 20% higher than
normal and with high winter gas usage and high gas prices. For the short-term risk assessment,
staff used an estimate of 32% of the annual gas commodity budget (about half -way between
the cold winter and cold winter/high gas price scenarios), or $4.9 million for FY 2014 and $5.1
million for FY 2015.
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Table 4: Cash Flow Needs (% of Annual Gas Commodity Budget)
Scenario Cash Flow Needs
Expected gas usage and gas prices 17%
Cold Winter (20% increased gas usage) 23%
Cold Winter and High gas prices (20% increased
gas usage and 25% higher gas prices)
43%
Gas Distribution Rate Stabilization Reserve (G-DRSR)
For the G-DRSR, the annual short-term reserve adequacy analysis involves an evaluation of the
distribution business risk factors, which include loss of load, unplanned variance in C IP
expenditures, and debt coverage ratio. Since most of the expenses on the distribution side are
fixed and most of the revenue is recovered through volumetric rates, loss of load results in a
shortfall in cost recovery. Table 5 presents the short-term risk assessment for the G-DRSR. The
risk due to loss of load is calculated using the maximum annual budget -to-actual variance in
distribution sales revenue during the past ten years, which was 15% in FY 2002. A 10% variance
for unplanned CIP is included in the risk exposure. The resulting reserve requirement for the G-
DRSR is $3.4 million for FY 2014 and $3.5 million for FY 2015.
Table 5: Gas Distribution RSR Annual Reserve Adequacy Analysis ($1000)
FY 2014 FY 2015
Distribution Sales Revenue $ 21,942 $ 21,924
Loss of Load @15% of Sales Revenue $ 3,297 $ 3,294
System Improvement CIP Budget $ 865 $ 1,611
Contingency @10% of the CIP Budget $ 87 $ 161
Total Reserve Requirement $ 3,383 $ 3,455
Reserve Requirement as % of Distribution Sales Revenue 15.4% 15.8%
Rate Stabilization Reserve Adequacy
Table 6 summarizes the results of the short-term risk assessment along with the existing
minimum and maximum reserve guideline levels and estimated FY year-end balances for the G-
SRSR and the G-DRSR for the current and next two fiscal years.
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Table 6: Gas RSR Guideline Levels and Short-Term Risk Assessment ($M)
For FY 2013, the G-SRSR is expected to fall within the minimum and maximum guideline ranges.
However, with the proposed reduction in the CIP budget over the next two years, the G -DRSR is
projected to be well above the maximum guideline level for the next two to three years.
Figures 3 and 4 show G-SRSR and G-DRSR levels, short-term risk assessment levels, and long-
term reserve maximum and minimum guideline levels for the duration of financial projections.
FY 2013
Projected
FY 2014
Projected
FY 2015
Projected
Gas Supply Rate Stabilization Reserve
End of Year Balance 6.3 6.0 5.7
Risk Assessment 4.1 4.9 5.1
Minimum Guideline Level (25% of supply purchase costs) 4.1 3.8 4.0
Maximum Guideline Level (50% of supply purchase costs) 8.1 7.6 7.9
Gas Distribution Rate Stabilization Reserve
End of Year Balance 6.0 9.4 11.3
Risk Assessment 4.0 3.4 3.5
Minimum Guideline Level (15% of sales revenues) 3.3 3.3 3.3
Maximum Guideline Level (30% of sales revenues) 6.6 6.6 6.6
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Figure 3
Figure 4
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Rate Comparison with Neighboring Cities
The City currently has a slight cost disadvantage with respect to PG&E as shown in Table 7
below. Comparisons are based on the median residential customer usage of 54 therms per
month during the winter months (November through April) and 18 therms per month during
the summer months (May through October). Monthly bills shown are based on rates effective
February 1, 2013.
Table 7: Gas Utility Residential Benchmark Comparison
Current FY 2013 (as of February 1, 2013)
Palo
Alto
Mountain
View
Redwood
City
Menlo
Park
Santa
Clara
Average
Benchmark
City
Monthly Bill ($) 39.27 35.30 35.30 35.30 35.30 35.30
Difference from CPAU -11.2% -11.2% -11.2% -11.2% -11.2%
The City’s current relative position with respect to neighboring cities may change in the future
depending on future financial decisions by PG&E.
Commission Review and Recommendations
At their February 13 and March 6, 2013 meetings the UAC reviewed the 5-year financial
forecasts for the Gas Fund. The February meeting was a preview of the financial forecasts and
the UAC discussed the CIP deferrals and their impact on operations and rate stabilization
reserve levels. The UAC also discussed how the supply RSR has become more of a cash flow
reserve, and that appropriate reserve levels would be assessed following a comprehensive rates
policy review. At their following March meeting the UAC further discussed the CIP deferrals,
and communication of future rate increases given the commodity price pass through, plans to
reduce greenhouse gas emissions related to the use of natural gas, and gas purchasing
strategies.
On March 6, 2013 the UAC voted 6-0, with one Commissioner absent, to recommend that the
Council not adjust Gas Rates effective July 1, 2013. The excerpted draft minutes from the UAC’s
March 6, 2013 meeting are provided as Attachment B, and excerpted final minutes from the
February meeting are provided in Attachment C.
Environmental Review
This recommendation does not meet the California Environmental Quality Act’s definition of a
“project” under Public Resources Code Section 21065.
Attachments:
Attachment A: Gas Utility Financial Projections (FY 2014-FY 2018) (PDF)
City of Palo Alto Page 13
Attachment B: Excerpted Draft Minutes of March 6, 2013 UAC Meeting (PDF)
Attachment C: Excerpted Final Minutes of Feb 13, 2013 UAC Meeting (PDF)
CONFIDENTIAL
Actual Adopted Projected
2012 2013 2013 2014 2015 2016 2017 2018
1 % CHANGE IN TOTAL SYSTEM RETAIL RATE -4.3%-8%-6%-1%2%1%2%1%
2 TOTAL SYSTEM AVG RATE ($/ THERM)1.36 1.25 1.19 1.25 1.27 1.29 1.32 1.34
3 SALES UNITS (THERMS)30,447 30,477 30,011 30,011 29,980 29,937 29,863 29,792
4 GAS UTILITY REVENUE
5 BASE SALES REVENUE:
6 SUPPLY SALES 23,689 15,055 13,434 15,651 16,275 16,537 17,314 17,924
7 DISTRIBUTION SALES 17,790 17,834 17,685 21,942 21,924 21,900 21,857 21,816
8 SUB-TOTAL BASE SALES REVENUE 41,479 32,889 31,119 37,593 38,199 38,437 39,171 39,740
9 RATE ADJUSTMENT (FIXED COMPONENTS)
10 SUPPLY 0 1,024 650 0 0 198 105 110
11 DISTRIBUTION 0 4,399 4,273 0 0 0 0 0
12 0 5,423 4,923 0 0 198 105 110
13 0 (184)(243)0 0 (5)(3)(3)
14 41,479 38,127 35,799 37,593 38,199 38,629 39,273 39,848
15 DISCOUNTS/UNCOLLECTABLES (236)(250)(250)(250)(250)(250)(250)(250)
16 TOTAL NET SALES REVENUE 41,243 37,877 35,549 37,343 37,949 38,379 39,023 39,598
17 INTEREST 1,119 813 813 718 386 420 384 327
18 SERVICE CONNECTION & CAPACITY FEES 592 720 720 580 602 640 662 686
19 OTHER REVENUES 103 124 124 124 124 124 124 124
20 FROM RESERVES
21 DISTRIBUTION RSR 0 2,481 2,344 0 0 1,384 2,355 3,473
22 SUPPLY RSR 1,170 904 1,289 284 370 256 254 256
23 COMMITMENTS & REAPPROPRIATIONS
24 TOTAL FINANCIAL RESOURCES 44,227 42,918 41,557 39,049 39,431 41,202 42,802 44,464
25 OPERATING EXPENSES
26 SUPPLY:
27 PURCHASES 16,235 16,286 14,611 15,170 15,845 16,152 16,801 17,381
28 OPERATIONS & MAINT., OTHER ADMIN.729 709 709 723 746 765 790 816
29 ALLOCATED CHARGES 277 157 157 157 162 166 170 174
30 SUB-TOTAL SUPPLY 17,241 17,153 15,478 16,050 16,752 17,083 17,761 18,372
31 DISTRIBUTION:
32 CUSTOMER DESIGN & CONN. (CIP)710 720 720 730 752 790 812 836
33 SYSTEM IMPROVEMENT (CIP)7,111 7,036 7,351 865 1,611 4,502 4,750 5,086
34 OPERATIONS & MAINT., OTHER ADMIN.9,131 7,673 7,673 7,847 8,104 8,319 8,604 8,900
35 ALLOCATED CHARGES 1,902 3,136 3,136 3,132 3,217 3,294 3,376 3,458
36 SUB-TOTAL DISTRIBUTION 18,853 18,565 18,880 12,574 13,684 16,905 17,542 18,280
37 TOTAL MAJOR ACTIVITIES 36,094 35,718 34,358 28,624 30,436 33,988 35,304 36,652
38 DEBT SERVICE 406 803 803 801 802 803 803 802
39 TRANSFERS:
40 GENERAL FUND TRANSFER 6,006 5,971 5,971 5,818 5,855 5,955 6,227 6,530
41 RENT 230 219 219 225 232 239 246 253
42 OTHER TRANSFER 170 207 207 206 212 217 222 227
43 SUB-TOTAL TRANSFER 6,406 6,396 6,396 6,250 6,299 6,411 6,695 7,010
44 TOTAL OPERATING EXPENSES 42,907 42,917 41,557 35,675 37,537 41,202 42,802 44,464
45 RESERVE FUNDING:
46 PLANT REPLACEMENT 0 0 0 0 0 0 0 0
47 DISTRIBUTION RSR 975 0 0 3,374 1,893 0 0 0
48 SUPPLY RSR 0 0 0 0 0 0 0 0
49 DEBT SERVICE RESERVE (148)0 0 0 0 0 0 0
50 SUB-TOTAL RESERVE FUNDING 827 0 0 3,374 1,893 0 0 0
51 TOTAL REVENUE REQUIREMENT 43,734 42,917 41,557 39,049 39,431 41,202 42,802 44,464
52 RESERVES BALANCES
53 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
55 DISTRIBUTION RSR 8,374 5,893 6,029 9,403 11,297 9,913 7,558 4,085
57 SUPPLY RSR 7,618 6,715 6,329 6,046 5,676 5,420 5,166 4,910
58 DEBT SERVICE RESERVE 804 804 804 804 804 804 804 804
59 TOTAL RESERVES BALANCES 33,789 27,020 26,521 32,702 35,750 32,471 27,253 19,794
60 COMMITMENTS & REAPPROPRIATIONS 18,899 18,899 18,181
61
62 Short Term Risk Assessment Value -Supply RSR 3,300 4,072 4,072 4,854 5,070 0 0
63 Short Term Risk Assessment Value- Distribution RSR 4,300 4,020 4,020 3,383 3,455
64
65 Long Term Rate Stabilization Guidelines
66 Supply RSR Minimum 4,849 4,072 4,072 3,793 3,961 4,038 4,200 4,345
67 Supply RSR Maximum 9,698 8,143 8,143 7,585 7,922 8,076 8,401 8,691
68
69 Distribution RSR Minimum 2,676 3,306 3,306 3,291 3,289 3,285 3,279 3,272
70 Distribution RSR Maximum 5,353 6,612 6,612 6,583 6,577 6,570 6,557 6,545
71
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Excerpted Draft
Utilities Advisory Commission Meeting
Minutes of March 6, 2013
ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Review the 5 -
Year Financial Forecast for the Gas Fund and Take Action on Whether to Recommend that
Council Approve an Adjustment to Gas Rates Effective July 1, 2013
Resource Planner Eric Keniston stated that the gas distribution rate stabilization reserve was
projected to rise to above the maximum guideline level due to the deferral of CIP projects .
Deferral of CIP projects is necessary due to the backlog of CIP projects.
Commodity Melton asked how the rate increases can be referred to when the commodity
portion goes up and down with the market prices. He recommended discussing the rate
increase proposals separately by component without the commodity component. He added
that this needs to be carefully explained to customers who may see upcoming rate increases,
but that are related to the commodity portion.
Chair Cook asked if staff anticipated any safety issues due to the deferrals of the gas CIP
projects. Assistant Director Tomm Marshall stated that CIP projects under construction
currently are targeted at removing the worst safety hazards in the gas distribution system. The
CIP projects that need to be delayed due to resource constraints are not a safety problem, but
are reaching the end of their useful life.
Chair Cook noted that the adoption of the Electric Carbon Neutral Plan raises the issue of how
to reduce greenhouse gas emissions related to the use of natural gas. He asked if there been
any analysis done to reduce gas usage and switch end uses from gas to electricity. Director
Fong stated that staff is working on that analysis and is preliminarily scheduled to present it to
the UAC in August.
Chair Cook asked whether there is a trigger to return to a gas laddering strategy in the event
that gas prices rise significantly. Director Fong said that staff is preparing a rates policy that will
allow the UAC to discuss the proper strategies for rates – whether it’s stable rates or passing
market signals on to customers. She added that it's chaotic to move back and forth between
market prices and reliance on hedging such as a laddering strategy.
ACTION:
Commissioner Eglash made a motion to recommend that the Council not adjust Gas Rates
effective July 1, 2013. Commissioner Hall seconded the motion. The motion carried (6 -0) with
Commissioner Chang absent.
Excerpted Final
Utilities Advisory Commission Meeting
Minutes of February 13, 2013
ITEM 2: PRESENTATION: Presentation on Financial Projections for the City’s Electric, Gas,
Water and Wastewater Collection Utilities
Assistant Director Jane Ratchye stated that the presentation on the financial forecasts is a
preview of next month's discussion. This month no information was provided in advance of the
presentation, but next month the full report will be provided with all information. In this
presentation, we will be showing options for the water and wastewater funds and would like to
get some feedback from the commission on these options.
Resource Planner Eric Keniston provided an overview of the 5-year financial forecasts for all
funds, stating it was possible to not have any rate increases for FY 2014. This is different from
last year’s financial projections, which had forecast the need for increases of 15% for water and
9% for wastewater. Electric and gas show no need for changes at this time. T here have been
some significant savings related to Capital Improvement Programs (CIP).
For the Electric Fund, no rate increases were shown to be needed, but supply costs
(renewables, transmission) were projected to increase, and distribution costs were pr ojected to
decrease due to decreased Capital Improvement Program (CIP) budgets in the next two years.
This was due to a backlog of projects as well as vacancies (under -filled positions, retirements,
fewer trainers for new employees). No rate increases are shown to be needed until FY 2016.
Commissioner Cook asked why there were vacancies in this economy, and whether it was a
structural issue. Director Fong stated that for skilled positions such as electric and gas
engineers there is a shortage.
Commissioner Eglash added that this is an industry wide problem for utilities.
Commissioner Hall observed that the large drop in CIP expenses is significant, and
Commissioner Cook asked whether this could cause a problem in the future with operations.
Director Fong stated that if a project came up that was required immediately, those would be
done.
Vice Chair Foster asked if there were zero dollars budgeted for undergrounding for FY 2014.
Keniston confirmed that this is true.
Regarding the Gas Fund, Keniston stated that since all customers now have market rate gas
commodity costs, the net revenue profile is relatively steady. In addition, other components
were brought into alignment with cost of service study as of the rates effective July 1, 2012. CIP
deferrals for two years will cause distribution costs to fall significantly so that the distribution
rate stabilization reserve (RSR) levels are projected to rise above the maximum guideline level
for several years. Options are to let the reserves be where they are, or to have rate decreases
(with increases later). The gas supply RSR is more of a cash flow reserve as market -based
commodity costs are passed through to customers. With a two month lag between billing and
revenue collection, funds should be in place to cover the potentially expensive float needed for
winter gas.
Commissioner Cook asked if the minimum and maximum guidelines are legal requirements.
Keniston replied that they are not legal requirements.
Commissioner Melton asked whether the high amount for the gas distribution RSR was all due
to CIP deferrals. Keniston confirmed that it was.
Commissioner Eglash asked if, given market prices for gas sales, whether RSR needs been re -
assessed. Assistant Director Ratchye stated staff will reasse ss the appropriate reserve levels
after completion of a rates policy. Director Fong added that the reserve is needed for cash
flow, so the reserve needs may not necessarily be reduced, but may be based on when we pay
for gas and when we receive the corresponding revenue from customers.
Keniston stated that the Water fund has seen large cost increases over the last few years. In FY
2014, it is possible to have no rate increase, although large increases would be needed starting
in FY 2015 if there were no rate increase for FY 2014. The reasons for lower expenses this year
include a return of capital funds in FY 2013 and a deferral of main replacement projects by one
year. Therefore, the Water RSR will be near to the maximum guideline level instead of the
minimum for FY 2013. Keniston stated that an alternative rate increase profile would be 7%
annual increases for the 5-year period.
Commissioner Hall asked if the SFPUC rates rising will be offset by the CIP decreases. Keniston
replied that this is the case for next year.
Commissioner Melton stated that if there is no rate increase next year, the following year
increase will be much higher and that in the past, the UAC generally counseled against that.
Commissioner Hall stated he preferred a level rate increase trajectory.
Regarding the wastewater fund, Keniston stated last year a 9% increase was projected for FY
2014, but with CIP main replacement deferrals of one year, revenues are expected to be above
expenses and the wastewater RSR is expected to be above the maximum guideline for FY 2014.
A double digit rate increase will possibly be needed in FY 2015. An alternative plan could have
a small increase in FY 2014, but reserves would be pushed above maximum guideline levels
with anything more than a small increase.
Commissioner Melton asked whether the cost growth was due to the treatment plant cost
going up. Keniston confirmed that this was the case.
Commissioner Melton stated that temporarily exceeding the maximum guideline level is not as
significant as dipping below the minimum guideline level. A one year peak over maximum is
not a big deal.
Commissioner Eglash stated he was uncomfortable with taking more money from ratepayers
simply to bank it for future cost increases. He would rat her leave the money with ratepayers,
especially when the reserve levels are above the maximum guideline level.
Commissioner Waldfogel stated the reserves should reflect deferred or accrued maintenance
cost. It sounds like there isn’t a plan to try and catch up with CIP projects.
Commissioner Eglash agreed, saying he was on a UAC committee reviewing the CIP in the past
and was impressed with the long-term plan to be current with infrastructure replacements. It is
a reason to be very proud of CPAU, but the notion when you can't spend at the rate you would
like to, or to treat CIP deferrals as a savings instead of a known cost or deferred expense for the
future creates some unease.
Director Fong added that CPAU has always practiced ‘pay as you go’ for CI P expenditures. The
consideration of budgeting for future CIP expenses is possibly in conflict the idea of not holding
more of ratepayer funds than actual expenses indicate.
Commissioner Eglash wondered if there is a matter of degree and of predictabilit y that makes
CIP different, but agreed that there is a conflict in objectives.
Commissioner Melton agreed that, if because of other limitations we have to defer CIP, it
seems appropriate to bank funds for the future when costs start coming along, includi ng that,
as a representative to the City’s Infrastructure Task Force, this is how the General Fund got into
trouble. If in the future Utilities has to do three years of work to get back on track, there should
be money in an infrastructure reserve fund to handle that.
Vice Chair Foster asked if there would be a situation of doing multiple projects at once in the
future, or if this would be a steady deferral out one year. Director Fong stated it was the latter.
Commissioner Waldfogel stated that ratepayers should expect to pay a portion of the life of
infrastructure, even if there are no expenses in one year, that it should not be a ‘jubilee’ of
sorts. Director Fong stated this would be an excellent discussion for the rates policy.
Assistant Director Ratchye asked whether the UAC had any direction for staff as to the
proposals to be provided in March.
Commissioner Eglash said that he is supportive of a flatter rate increase for water, rather than
zero in FY 2014, as this has always been expected. However, he would support zero for
wastewater as the reserves would go above the maximum guideline level.
Commissioner Melton said that he supports the steady, moderate rate increase alternative for
water as he would like to avoid double digit rate increases in water in the future. However, he
said he feels less strongly for wastewater since the dollars are not that large.
Commissioner Eglash encouraged staff to think about the input provided on the CIP funding as
he is very interested in not treating the CIP deferrals as savings, but look at opportunity to bank
the money for catching up with the CIP projects.
Commissioner Melton asked about how much of the fixed costs for the gas distribution and
water costs are collected with fixed charges and how much is collected with volumetric charges.
Ratchye stated that according to the cost of service study, some of the fixed costs are assigned
to be collected with fixed charges, but not all the fixed costs.
Commissioner Waldfogel asked if staff will be coming back with the fiber fund financial
information. Keniston said that there are no plans to do that at this time since rate increases
for the fiber fund are based on the Consumer Price Index.
Director Fong stated that the City Auditor completed an audit of CPAU's reserves and that their
advice was not to store money in reserves, but to only charge customers what is needed in a
particular year.
Vice Chair Foster indicated his support for steady rate increases for water, but said that he did
not have a strong opinion on wastewater.